O’Donnell Solicitors Guide to Inheritance Tax Planning

Demystifying Inheritance Tax

Inheritance tax is a concern for many people in our local area with house prices often increasing the value of estates above the Inheritance Tax threshold. Understanding your potential inheritance tax liability and undertaking good planning at an early stage is vital.

The general allowance (known as the nil rate band) for people domiciled in the UK is £325,000. That means if your assets are below this amount at the date of your death then your estate will not be subject to Inheritance Tax. If your assets exceed this amount then inheritance tax is payable on the amount over £325,000 at a rate of 40%.

There are certain exemptions and reliefs however that are available dependant on your circumstances;

·         Spousal exemption

Gifts which are left to your spouse or civil partner (provided you are both UK domiciled) are exempt from inheritance tax. This is important to be aware of with an increasing number of couples now choosing not to marry or enter into a civil partnership. Although it may not be the most romantic reason to get married, if you have a long-term partner and your individual assets exceed your inheritance tax allowance, marriage may in fact be a form of lifetime planning to consider.

·         Transferrable Nil Rate Band

The Finance Act 2008 brought important changes to the nil rate band if you were married by allowing spouses to use each other’s nil rate band. This means that on the death of the second person in a married couple to die, that persons estate has not only the deceased’s persons allowance of £325,000 but also the deceased’s spouse exemption of £325,000 and therefore, a pot of £650,000 is available before any inheritance tax is payable on the estate of the second person to have passed away.

·         Leaving 10% of your estate to charity

If you leave 10% or more of your net estate to charity in your will, then the rate of inheritance tax you pay on the value of your estate which is subject to inheritance tax, drops from 40% to 36%. This only applies to deaths after 6 April 2012.

·         Agricultural Property Relief

If you have any agricultural property in your estate, then provided that certain conditions are met, a relief is given so that the value of that property is reduced by either 100% or 50% for inheritance tax purposes. Certain conditions have to be met for this to apply to your assets and therefore good advice at an early stage is important to see whether this applies to your estate.

·         Business Property Relief

Certain business interests, shares and assets are reduced in value for inheritance tax purposes by either 50% or 100% provided certain conditions are met. The assets must have been owned for at least 2 years prior to your death. This is in an important tool to be used in lifetime planning and is an important consideration for those planning to sell or exit their business to fund their retirement. If you have qualifying shares in a business, on your death these are reduced by 100% and therefore do not incur an inheritance tax liability. If however you then sell those shares, the cash you have received in exchange for those assets is then subject to inheritance tax and so careful planning on any business exits needs to be undertaken.

·         Residence Nil Rate Band (RNRB)

The rules relating to the RNRB are too involved to cover fully in this article, however in summary to qualify for the additional RNRB you must have an interest in a property, which is ‘closely inherited’ (‘closely’ means to a lineal descendant- however this definition is fairly wide and includes step and foster children).

The amount of RNRB will be £100,000 in 2017/2018 increasing by £25,000 each tax year until it reaches £175,000 in 2020/2021. This RNRB applies in addition to ordinary nil rate band and can also be transferred between spouses.  The limits are a maximum and the amount claimed is capped at the value of your interest in a residential property (note this can only be one property and it must have been used as a residence at some time during your ownership). The RNRB only applies in full to estates under £2m and is reduced if your estate exceeds this amount.

Using the RNRB it can therefore be seen that from 2020/2021, if you meet the above criteria you could qualify for the RNRB of £175,000 in addition to your ordinary nil rate band of £325,000 meaning you could have a nil rate band of £500,000, which can be transferred to your spouse therefore showing how a few people could eventually have a £1m allowance.

Back in 2007 the Conservative Party said at their party conference that they were in favour of increasing the nil rate band to £1m. Many headlines have suggested that the new residence nil rate band will have this effect but that is far from true. A few lucky people could have a combination of nil rate bands by 2020/2021 which add up to £1m but this will be a minority.

The new RNRB has been criticised as being targeted as it is tied to homes and direct lineal descendant as only those with lineal descendants and a property or interest in a property can benefit. It has been said that for the same cost in tax to the revenue there could have been an increase instead by £60,000 on the ordinary nil rate band for everyone.

Inheritance tax planning is complex and specific to each individual’s financial circumstances. It can be seen from the exemptions and reliefs above that careful specialist advice is needed if you are to reduce the impact of Inheritance Tax on your estate.


At O’Donnell Solicitors we pride ourselves on offering expert knowledge at a convenient location with our offices in Uppermill and Grasscroft. Should you wish to take advice on inheritance tax, life time planning, trusts, wills, lasting power of attorneys or estate administration please contact our Rebecca O’Donnell on 01457 761320 or at [email protected]